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Disrupting business models in connected entertainment

Author

Kate Bulkley

Published

01 Mar 2017

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In the past few years, traditional business models for channels, broadcasters and production companies have had to be re-drawn. Kate Bulkley reports.

The direction of travel is clear: in the face of online outlets like YouTube, Netflix and Amazon Prime and the shift of particularly younger consumers away from traditional media, the dominance of the traditional video ecosystem is coming to an end.

Both traditional TV advertising and big-bundle pay TV subscriptions are under pressure. The total amount of traditional TV viewing – live, VoD and PVR – is falling, particularly among younger audiences who are accessing more video on their handheld devices online and, increasingly, via social media sites like Facebook. Pay TV companies are seeing subscribers deserting their ‘big-bundle’ services in favour of cheaper alternatives. It may not be a stampede, but it’s a trend and it’s growing.

A US study by SNL Kagan found that the monthly minutes of video viewing in 2016 delivered by some of the biggest media companies have all seen double digital declines from the same period in 2011, with NBCU down 11%, Disney down 14%, Viacom down 35% and Time Warner down 21%, and two other companies were essentially holding steady, 21st Century Fox and CBS. Only Discovery was up 33% this year in its monthly minutes of video viewing versus 2011.

What’s clear is that the power of the traditional gatekeepers is eroding with the emergence of connected devices and the ability of anyone to become a “content creator”. Consumers have easy access to content from a growing variety of sources, led by Google’s YouTube, online services like Netflix and Amazon Prime, and social media players like Facebook and Twitter. The impact has been huge on all parts of the video value chain, from production, where new brands and talents can build brands and scale altogether bypassing the traditional gatekeepers, to distribution, where consumer choice means that traditional players have to up their game to remain attractive.

All the available choice means that attracting consumer attention has become more difficult and that has hit advertising as well. As Dominique Delport the global managing director of advertising group Havas said earlier this year, the mass-marketing, ad-based TV model, which has been a winning formula for 50 years, is no more. “Unfortunately the party is over,” he said.

The rise of online options and shifting consumption habits has driven changes in business strategies and a wave of consolidations that seem set to continue.

In the US, merger mania has been led in many cases by big telcos such as AT&T agreeing in October to buy HBO and CNN owner Time Warner for US$85.4bn. The deal creates a giant company able to both produce and distribute content to millions with mobile phones, broadband subscriptions and satellite TV services. Comcast’s US$30bn takeover of NBCUniversal and Verizon Communications’ serial takeover of AOL, The Huffington Post and Yahoo are other examples.

The big deal waiting in the wings is the potential re-merger of CBS with Viacom; companies that split 10 years ago. Now putting CBS’s free-to-air broadcasting and online services together with Viacom’s big pay TV brands like MTV and Cartoon Network, is about broadening the revenue footprint. Indeed, Viacom is no longer simply a pay TV channel provider: it purchased the UK’s Channel 5 in late 2014, and just last month (November 2016) it paid $345mn to buy commercial Argentinian broadcaster Telefe, which airs 7 of the top 10 shows in that market, has a library of 33,000 hours of local content and produces 3,000 new hours of content a year.

In Europe, Liberty Global, which has traditionally been in the cable broadband operator business, has added mobile assets and partnerships as well as content production to its portfolio, buying a stake in the UK’s biggest TV production company All3Media, the maker of Midsomer Murders, buying a Belgian mobile operator to link with its telnet cable broadband operator and partnering with Vodafone in Holland.

In France, the Bollore family, which controls marketing and advertising giant Havas, as well as Vivendi’s Universal Music and pay TV and content producer Canal Plus, has been trying to branch out further in a deal with Italian media company Mediaset. The Italian deal has floundered on price but the intention is clear: to fight against the power of the global digital giants like Google, Amazon, Netflix, Microsoft and Apple, European companies need to be bigger.

“TV is not defenceless,” says Adam Smith, futures director at GroupM, part of WPP. “Making money on all the platforms media uses is the idea. Audience measurement is an obstacle. Price is another – but caveat emptor: you can buy as cheaply as you like on digital. There is always someone willing to supply digital inventory, or what passes for it, at any price.”

Embracing a multi-platform and multiple-revenue approach is the focus at National Geographic. The factual TV company is paring back its original commissioning to focus on big, event-style programming that stands out in an increasingly noisy and fragmented media environment.

It’s six-part Mars series, which is set in 2033 and follows the progress of the first crewed mission to the red planet, is a template for how Nat Geo sees the way forward: Mars combines scripted drama from film-maker Ron Howard and Brian Grazer with VFX and documentary sequences. It launched November 13th alongside a cover story Mars feature in the iconic yellow-bordered National Geographic magazine alongside a companion online and social media presence. “You have to be perceived to be worth paying for,” says National Geographic Global Networks chief executive Courteney Monroe. “There is no other way to prevail in the future, so swinging for the fences with content that really aligns with our brand is the path to success.”

It launched November 13th alongside a cover story Mars feature in the iconic yellow-bordered National Geographic magazine alongside a companion online and social media presence. “You have to be perceived to be worth paying for,” says National Geographic Global Networks chief executive Courteney Monroe. “There is no other way to prevail in the future, so swinging for the fences with content that really aligns with our brand is the path to success.”

“The total amount of traditional TV viewing – live, VoD and PVR – is falling, particularly among younger audiences who are accessing more video on their handheld devices online and, increasingly, via social media sites like Facebook.”

Standing out for broadcasters like UKTV has meant ramping up their original commissioning budgets by 20% for shows like Taskmaster and Dave Gorman Modern Life is Goodish, as well as expanding brand-funded content. The broadcaster has also built its online presence with its UKTV Play service and grown its distribution footprint by putting its Dave, Yesterday and Really channels on Freesat earlier this year.

The moves have paid off, with UKTV’s portfolio share of UK commercial impacts at nearly 10%, which puts it ahead of both Sky branded channels and Channel 5. “We have made a deliberate move to premiere our premium UKTV Originals on UKTV’s own on-demand service, UKTV Play, before they air on linear TV,” says Richard Watsham, director of commissioning UKTV. “This has helped UKTV Play become the network’s fastest growing brand and its direct-to-consumer service is currently 85% up on views year-on-year. We also have ambitions to commission more original short-form content to help grow the platform further and serve our viewers in the OTT environment.”

Attracting younger viewers is a key goal as media companies struggle to remain relevant. Nearly all the big players from Disney to 21st Century Fox have purchased stakes in so-called Millennial brands like Vice Media, which caters to younger viewers across a raft of online brands from lifestyle to news. Another example of this is Sky, which bought a stake in Whistle Sports, an online sport channel. Modern Times Group has invested in esports, another big youth trend, by buying control last year of ESL Media, the world’s largest online video gaming company, owner of online leagues and tournaments including Intel Extreme Masters.

Traditional media companies are also taking a page out of the online playbook and launching direct-to-consumer brands themselves, like NBC Universal’s new online streaming service HayU, which offers a menu of back-to-back reality TV shows including Made in Chelsea and Keeping up with the Kardashians. Pay TV operator Sky pioneered the strategy of creating its own pay TV lite brand Now TV to appeal to those customers who might not want to pay for the fully loaded Sky subscription but wanted a Netflix-style service on a monthly contract. Now four years old, Now TV has an estimated 700,000 subscribers.

In the wake of Netflix announcing the addition of offline viewing (the ability to download programmes), YouTube adding 4K for live viewing and amid reports that it is putting together a streaming TV service called Unplugged, including channels such as CBS, big pay TV companies including Sky and rival UK pay TV operator Liberty Global-owned Virgin Media are looking to make their services more comprehensive and more appealing.

Sky has boosted its original programming over the past half decade, with projects like The Young Pope starring Jude Law, which debuted this year across all three Sky platforms, UK, Italy and Germany. The pay TV operator has recently added a mobile offering and has also taken on the OTT threat head on launching its own OTT service Now TV. Four years on and Now TV has an estimated 700,000 subscriptions and is so successful that some observers wonder if it is taking away too many traditional, higher-value subscribers. Earlier this year, Sky launched its Sky Q box, including an area on the EPG with access to online content such as YouTube and Red Bull TV, although it drew the line at offering Netflix. The new boxes also include all the bells and whistles of on-demand, catch-up and binge viewing.

Meanwhile, Virgin TV announced its new V6 set-top-box bundles Netflix and music service Vevo into the EPG, while also allowing viewing across multiple screens, multiple recording functions, an improved mobile viewing app and its own tablet. Sky is also ramping up its original commissioning while Virgin has commissioned a quartet of original series from All3Media. “Our approach (to content) is strategic and surgical,” he said. “We are not going to get into an arms race with Netflix,” said Bruce Mann, managing director of programing for Liberty Global, referring to Netflix’s plans to spend US$6bn on content in 2017, including 1,000 hours of “premium original programming”, a significant increase from 600 new hours in 2016.

“This high cost for premium TV is also starting to seep into unscripted programming as well. Amazon Prime invested many millions into The Grand Tour, while Netflix announced that it plans to release 20 unscripted series next year to help differentiate its service from rivals.”

Discovery has been in this revenue innovation game for a number of years, diversifying in fundamental ways such as buying free-to-air channels in Scandinavia.

But it is Discovery’s purchase of TV channel Eurosport and its acquisition of the multiplatform rights to the Olympics starting with the 2018 Winter Olympics that takes its factual TV focus to a new level.

Eurosport will be a key distribution platform for Olympics coverage through a €1.3bn agreement inked in June 2015 for the multiplatform rights to the Olympic Games over the six years beginning in 2018. And even more live sport for Eurosport may be on the cards given John Malone’s Liberty Media’s recent US$4.4bn purchase of the Formula One racing franchise. Malone is a major shareholder in Discovery and an obvious outlet for F1 would be via Eurosport, and the online Eurosport video player app.

Tapping into the appetite for mobile viewing of video, which is on a steep growth curve, is Viacom’s launch of its mobile streaming service PlayPlex, an online product for pay TV partners like Virgin Media subscribers but that is now looking to ink deals with mobile operators such as SingTel in Singapore. Viacom also has launched direct-to-consumer services via the App Store and Google Play, including pre-school mobile streaming service, Noggin, that has been running since the early part of 2015 and has been downloaded more than 1 million times.

Not every brand extension has to be online. This month Turner Broadcasting unveiled its partnership in a theme park called IMG Worlds Of Legends that will open in Dubai with dedicated Cartoon Network Zone.

Production companies are also having to readjust their businesses in the post-Netflix world where episodic drama series are in big demand and can command average costs per hour of £3mn, up from £800,000 six years ago. Netflix’s The Crown is reportedly the most expensive TV drama ever at a cost of $100mn for 10 episodes.

For companies like Endemol Shine, to come up with the funds for big, lush dramas means a shift to international co-productions. Known for its factual series, including Big Brother, Deal or No Deal and Masterchef, Endemol Shine produced 88 shows/series in 2016, of which 26 were dramas, including some with Netflix (Black Mirror), Amazon (Ripper Street) and with broadcasters Channel 4 (Humans), HBO and Sky Atlantic (Fortitude, a co-pro between the two). By contrast, Endemol Shine produced 15 dramas in 2015; three years ago, it produced just four.

However, this high cost for premium TV is also starting to seep into unscripted programming as well. Amazon Prime invested many millions into The Grand Tour, the recently released re-boot of the ex-Top Gear team led by Jeremy Clarkson while Netflix announced last week (December 2016) that it plans to release 20 unscripted series next year to help differentiate its service from rivals.

Given that consumers now have so many different options to watch content via their digital devices, it’s the viewer that has the ultimate power. Happily, for the health of their businesses, that’s something that the media companies have started to take on board.

“Consumers have easy access to content from a growing variety of sources, led by Google’s YouTube, online services like Netflix and Amazon Prime, and social media players like Facebook and Twitter. “

Kate Bulkley is a business journalist with extensive experience both on camera, in print and on stage, Kate's speciality is asking top brass that difficult and revealing question and analysing and writing/broadcasting about the technology, media and telecommunications sectors and the convergence of all this.

This article was originally part of an exclusive report for Media + Networks published in November 2016